Option of the Tax Regime has to be exercised carefully by the Taxpayers with Business Income

Option of the Tax Regime has to be exercised carefully by the Taxpayers with Business Income

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Option of the Tax Regime has to be exercised carefully by the Taxpayers with Business Income

 

Income Tax Return for the FY 2020-21 (AY 2021-22) has to be filed by the individual taxpayers by choosing the optional tax regime. Every Individual & HUF have the option to choose between the Old Tax Regime vis a vis New Tax Regime. Though the new Tax Regime provides for concessional tax rate, it is with a rider that the taxpayers will not be able to claim various deductions and exemptions. Before taxpayers opt for the new tax regime, following points must be noted by the taxpayers:
  1. Option of the Tax Regime has to be exercised carefully by the Taxpayers with Business Income:
    Taxpayers without any business income will have a free entry & free exit option in the new regime. Decisions can be taken in isolation every year as per the income, deductions and exemptions of every year.
    However, it is not so for a person having business income wherein option once exercised cannot be withdrawn except on one subsequent occasion. In short, taxpayers have to be very careful while exercising an option of a new tax regime as contained in section 115BAC. More importantly, the option has to be exercised not only considering the income of the current financial year but also considering the future planning & its impact in the succeeding years.
  2. Filing of Form No. 10-IE :
    For opting the New Tax Regime, filing of Form No. 10IE is mandatory if the taxpayers have income from Business and profession. Without filing Form No. 10IE, such taxpayers cannot take the benefit of the New Tax Regime.  However, for taxpayers who don’t have income from Business and profession, filing of Form No. 10IE is not required and such taxpayers can opt for the new tax regime by just clicking it at the relevant in the ITR Form 1 or Form 2.
  3. Declaration by the employee to the Employer and Filing of ITR forms by the Employee:
    Employees are required to intimate the choice of tax regime to the employer for doing the TDS at the commencement of the financial year . It may be noted that the employee can revisit the option and can file the return on the basis of a suitable option which may be different from the option given earlier for doing TDS to the employer.
  4. The difference of tax rate in the Old Regime vs New Regime is as under:
Income Slab
Tax Rate under Old Tax Regime
Tax Rate under New  Tax Regime
Up to Rs. 2.50 Lakh
0
0
Rs. 2.50 Lakh to Rs. 5 Lakh
5%
5%
Rs. 5 Lakh to Rs. 7.50 Lakh
20%
10%
Rs. 7.50 Lakh to Rs. 10 Lakh
20%
15%
Rs. 10 Lakh to Rs. 12.50 Lakh
30%
20%
Rs. 12.50 Lakh to Rs. 15 Lakh
30%
25%
Above Rs. 15 Lakh
30%
30%
The old regime has just 3 applicable tax rates of 5%, 20% & 30%, as against 6 slab rates of tax under the new tax regime. Income above Rs. 15 Lakh is unaffected whether it’s a new tax regime or an old tax regime. New tax regime requires taxpayers to forgo most of the exemptions & deductions and so taxpayers are in a dilemma of making the right choice.
  1. Which Tax Regime is better for the Taxpayers?
    This is the most common question which is there in the mind of every taxpayer? Let us first compare the tax liability without any deductions & exemptions on income at every peak point of income slab in case of individual & HUF taxpayer (who is not a senior citizen & not salaried taxpayers):
 Income of the Individual/HUF
Tax in Old Regime*
Tax in New Regime*
Tax Saving
Rs. 2.50 Lakh
0
0
 0
Rs. 5 Lakh
13000#
13000#
0
Rs. 7.50 Lakh
65,000
39,000
26,000
Rs. 10 Lakh
1,17,000
78,000
39,000
Rs. 12.50 Lakh
1,95,000
1,30,000
65,000
Rs. 15 Lakh
2,73,000
1,95,000
78,000
Rs. 20 Lakh
4,29,000
3,51,000
78,000
(In the New Income Tax regime, Tax slab rates are the same for all individuals including senior citizens and Very Senior citizens).
Tax calculated above is inclusive of 4% cess.
Ignoring tax rebate u/s 87A.
Apparently, though the new regime displays net savings in tax but it may not be positive for all taxpayers after considering exemptions and deductions. Though the new tax regime is simple to follow yet it will be worthwhile to do the mathematics before opting for it. The million dollar question is, how should taxpayers make this choice? Both regimes have their own sets of pros and cons. The choice would necessarily dependant on:
i. Income slab of every individual.
ii. Extent of exemptions and deduction available with the taxpayers.
iii. Alternate investments options & returns thereon if taxpayers prefer not to opt for the new regime.
 ii. Short term and long term financial goals of the taxpayers.
Making the Choice of Better Tax Regime:
Taxpayers have absolute freedom & flexibility to make the choice for better tax optimization. One needs to calculate the total income tax under the old as well as new regime individually. So long as the benefit of exemptions and deductions is more than the impact of higher tax rates under the old tax regime, it would be advisable not to opt for the new tax regime but continue with the old tax regime. It makes sense to evaluate before taking a final call. To be more specific, if any taxpayer has an admissible deduction & exemptions of more than Rs. 3 Lakh then it will generally be advisable for such taxpayers to remain in the old tax regime irrespective of their income slab. The following observation may be helpful in choosing the right tax regime for the taxpayers:
  1. Many senior citizens may not be taking any tax breaks available under section 80C, 80D or Housing loan interest. In such cases, it would always be advisable to opt for the new tax regime as it would entail lower tax burden on them.
  2. For taxpayers who have higher family or personal commitment and find it difficult to save & invest money adequately, a new tax regime would be a boon for them. Similar will be the case of individuals who don’t have commensurate exemptions/ deductions.
  3.  Taxpayers with income up to Rs. 7.50 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of just Rs. 2 Lakh may find it relevant to stay in the old tax regime.
  4. Taxpayers with income in the range of Rs. 7.50 Lakh to Rs. 10 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 2.50 Lakh may find it relevant to stay in the old tax regime.
  5. Taxpayers with income in the range of Rs. 10 Lakh to Rs. 12.50 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 2.25 Lakh may find it relevant to stay in the old tax regime.
  6. Taxpayers with income in the range of Rs. 12.50 Lakh to Rs. 15 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 2.50 Lakh may find it relevant to stay in the old tax regime.

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